Croydon Council’s Pensions Committee meetings should be uncontroversial affairs, a few finance-minded members meeting to agree how best to manage the council pension scheme under the guidance of professional advisers. But the ruinous policies followed by its Labour chairs since they took control in 2014 have now led to fully-blown meltdown and a rift in relations between the administration and its pensioners.
For some years the council has followed a so-called ‘ethical investment strategy’ which has resulted in much lower yields to the scheme and it running the risk that in the future it will have insufficient funds to pay its liabilities.
Now the administration has gone further and decided to stop paying its regular contributions and instead agree that in forty years time it will gift the pension fund a portfolio of residential properties which, if house prices grow as expected, should make good the shortfall caused by the reduction in contributions. Under normal circumstances a council pays cash contributions and asset managers invest this money in a range of funds and assets to protect and grow their value, so that in the future it can meet the needs of its pensioners.
Everyone, opponents included, agree that this asset transfermightwork. The trouble is, it also might not. And doing it at a time of great economic uncertainty, as we are now, is very risky. What if house prices don’t grow in the way the administration expects? What if there is a property slump?
The ethical dilemma that councillors face is that, as trustees of the pension fund, their obligation is to act in the best interests of the fund and its pensioners. Whether their decisions are in the best interests of the council should not be a factor. The fear around this decision is that whilst it is clearly in the best interests of the council – it can take a pensions contribution ‘holiday’ and thus save large sums of money – many pensioners believe it is not in the best interests of the fund. It is notable that the pensioner representatives on the committee voted with the Conservatives to oppose this scheme – but the administration just used its majority to railroad it through.
The decision came to full council on 28 January for ratification. The administration used its control of the agenda to stifle debate, refusing a request for the decision to be questioned or debated before the vote. Conservative pensions committee member, Cllr Luke Clancy (who is a financial journalist in his ‘day job’), tried valiantly to make a point of personal explanation before the vote was taken but was, as usual, prevented by Labour from being heard.
So here is what he wanted to say:
As a Pension Committee member I want to explain why I think this is a bad deal for the pension fund.
The Council is transferring an undiversified low performing asset, that doesn’t have an income stream, into the pension fund just so it can reduce its contributions and help fund the revenue budget.
There is also a potential conflict because both parties in the trade have relied on the same specialist legal advice. If you were buying a house from a third party would you use the same lawyer as the seller?
Minority group members voted against this proposal because it risks the pension fund being poorer off while the current administration reaps the benefits in its revenue budget.
If this investment leaves the fund worse off in 40 year’s time it will be for a future generation to clean up the mess.
This is an already underfunded pension scheme. As of the last triennial valuation it was only 73% funded in relation to its liabilities. But by investing in these assets we are missing better opportunities to make up that shortfall.
It is not cash-flow generating and promises a return of less than four percent, compared to the Fund's Asset Allocation target of six percent in the private rental sector.
This investment will take up 10% of the fund’s value. One of the central tenets of pension fund investment is the concept of diversification, or not putting all your eggs in one basket. Yet the asset offered by the Council is an undiversified portfolio of local affordable housing concentrated in one corner of London.
Pension committee members are responsible for ensuring sufficient assets are available to meet the Fund’s liabilities. Our duty is towards the members of the fund and the pensions that must be paid to them.
The asset proposed for transfer is both less fungible than cash(Editor’s note: you can’t easily use a note promising to give some houses in the future to pay your liabilities or turn it into cash)and more difficult to value. As a Pension Committee member I cannot have confidence that the asset transfer is a more certain means to fund the pension liabilities than continuing with the system of contributions from the local authority.
The independent Local Pension Board has also raised concerns about the need for separate advisers on this asset transfer, the risk return profile of the investment compared to the scheme’s liabilities and the general governance of the proposal.
The council is doing this so it doesn’t have to pay contributions to correct the damage it has done to the fund’s value with its investment policies. That includes firing trusted advisers and managers, restricting the investment mandate and hence the returns achievable and ignoring warnings in a recent governance report.
Lastly, in 40 years' time the Fund could then dispose of these assets once it owns them. Does this create the potential for a conflict of interest between the corporate housing policies of the Council and the interests of the pension fund members at that point?
Overall this is very bad practice on the part of this Labour administration.